HB 191-OIL AND GAS CORPORATE TAXES  2:10:19 PM CO-CHAIR NAGEAK announced that the final order of business is HOUSE BILL NO. 191, "An Act relating to the oil and gas corporate income tax; and providing for an effective date." CO-CHAIR NAGEAK noted the committee will not take any action on HB 191 and the bill will be held over for future discussion. 2:10:43 PM REPRESENTATIVE SEATON, sponsor, introduced HB 191 using a PowerPoint presentation. He said HB 191 would ensure fair and equitable treatment among [corporate] taxpayers, whether they are multi-national companies or Alaska companies producing oil or gas only in Alaska. He addressed slide 2, explaining that worldwide apportionment attributes a percentage of a corporation's total worldwide expenses to each jurisdiction and treats the [parent] company and all of its subsidiaries as a single entity for tax purposes. The problem is that when a corporation's subsidiaries outside of Alaska are less profitable than they are inside of Alaska, it reduces the taxes the company pays to Alaska to account for the expenses incurred overseas or in the Lower 48. He noted he is using the word profit a little vernacular; everyone understands what that means - people are often talking about net margin, which means profit before taxes. Continuing, he explained that under separate accounting each jurisdiction is looked at separately. The difference between the revenue generated in a jurisdiction and the expenses attributed to generation of that revenue in a jurisdiction is the net margin/profit. The method of separate accounting means that everybody is going to pay the same. A corporation that exists solely in Alaska, producing oil and gas in Alaska, with all expenses related to Alaska, will pay 9.4 percent tax on its profit. Historically under worldwide apportionment, the multi- national corporations pay much less than 9.4 percent tax because they can write off their overseas expenses against the profits they made in Alaska. 2:14:07 PM REPRESENTATIVE SEATON turned to slide 3, "History of Separate Accounting," reporting that Alaska originally began with worldwide apportionment and found it was not collecting what it felt was its fair share from revenues generated in Alaska. The state subsequently changed its system to separate accounting, using this system from 1978-1981, but the state was sued by oil companies. The fear was the amount of money the state would have to pay to the oil companies if the state lost the lawsuit because the companies would be paying less under worldwide apportionment, so the legislature went back to worldwide apportionment. The state ended up winning on all counts in the Alaska Supreme Court. This was appealed to the U.S. Supreme Court, but the U.S. Supreme Court dismissed the case because it didn't bring up any issues of federal importance. He moved to slide 4 to show the cover page of the lawsuit case [in the Alaska Supreme Court]. Displaying slide 5 he pointed out that during the years 1978-1981, inclusive, the total difference between separate accounting and worldwide apportionment was $1.8 billion. Fearing Alaska might have to repay this amount, the legislature repealed separate accounting. Representative Seaton explained that slide 6 is from a presentation made by Dan Dickinson of the Department of Revenue in 1999. Between 1982 and 1997 the state collected $4.6 billion less by using worldwide apportionment than it would have collected using separate accounting. He clarified that the only thing being talked about is deduction of expenses from overseas, the tax rate would not be changed and would remain at 9.4 percent. He noted slide 7 is a graphic representation of Mr. Dickinson's report. The blue bars are what the state actually collected and the grey bars are what would have been collected at the same tax rate under separate accounting, with the difference between the quite large. 2:17:36 PM REPRESENTATIVE SEATON related that an argument heard is that separate accounting is difficult to do. He displayed a synopsis (slide 8) of the two states (Oklahoma and Mississippi) and the 80 countries that use separate accounting, drawing attention to the companies that operate in Alaska as well as those two states and the other countries. [Companies operating in both Alaska and Mississippi include Anadarko Petroleum, Apache Corporation, Aurora Exploration, Chevron USA, ExxonMobil, Hilcorp Energy Company, Shell Oil, Tesoro, and Ultra Oil & Gas; Companies operating in both Alaska and Oklahoma include Anadarko Petroleum, Apache Corporation, BP Exploration & Production, Chevron USA, ConocoPhillips, ExxonMobil Corporation, and XTO Energy]. He pointed out that it is more difficult for the companies to do separate accounting in Oklahoma and Mississippi because there are close adjoining states where the companies are also doing oil and gas development, while Alaska is thousands of miles away from another state. Regarding the 80 oil-producing countries, he reported that for nonresident corporations in these countries the vast majority of the companies must use separate accounting. [Companies operating in both Alaska and other countries include Anadarko Petroleum, Apache Corporation, BP Exploration & Production, Chevron USA, ConocoPhillips, Eni Petroleum, ExxonMobil Corporation, Repsol, Shell Oil Company (Royal Dutch Shell), and Statoil]. Thus, these companies already are doing separate accounting. Ten states in the U.S. allow a company to choose whether to use worldwide apportionment or separate accounting, he added, and almost always the companies choose worldwide apportionment. However, that doesn't mean the companies aren't calculating it all the time because they will swap back and forth when it is beneficial. 2:19:33 PM REPRESENTATIVE SEATON reviewed the tax rates and net income for the top five oil companies paying taxes to Alaska for tax years 2006-2013 (slides 9-12). He explained ConocoPhillips is separated out [slides 11-12] because it is the only corporation required to separate its Alaska production, thus it is the only company that reports it to the Securities and Exchange Commission (SEC). Because tax data in Alaska is confidential, data for the top five companies in Alaska is combined into an aggregate rather than individually for each of those companies. Turning to slide 10, "Top Five Oil Companies - Corporate Income Tax Comparison," he pointed out that in 2013 the tax paid under worldwide apportionment was $355 million less than what it would have been under separate accounting. Further, between 2006 and 2013 the effective tax rate paid to Alaska by these five multi- national companies declined [from 10.1 percent] in 2006, when there was a change in tax rate halfway through the year, to 4.4 percent in 2013. However, an Alaska-only company pays 9.4 percent corporate income tax. 2:21:40 PM REPRESENTATIVE SEATON brought attention to slide 11, "Table 2: ConocoPhillips Exploration and Production Net Income per Barrel of Oil Equivalent by Selected Jurisdictions." He noted that the average net income per barrel [for the years 2000-2014] is $18.73 for Alaska, $7.66 for the Lower 48, and $10.95 for the global total. Those differences in net income per barrel of oil equivalents is explained by the taxes being paid to Alaska being less than half of what would be required of an Alaska-only producer. There is a problem with mixing oil and gas because gas is generally less profitable. However, the companies have never separated their oil production from their gas production; they have been asked to do so, but they have declined. Displaying slide 12, a graphic representation of the numbers on slide 11 for ConocoPhillips, he noted the huge difference in net income per barrel that is seen on the graph. 2:23:32 PM REPRESENTATIVE SEATON moved to slide 13 to continue addressing ConocoPhillips and Alaska. He explained he isn't picking on ConocoPhillips, but since ConocoPhillips is the only corporation required to make reports to the SEC [the information is available]. Bringing attention to slide 14 depicting a 2011 article from Petroleum News, he noted that Greg Garland, the ConocoPhillips senior vice president for exploration and production in the Americas, states that ConocoPhillips likes the Eagle Ford [shale play in Texas] because [the $45 per barrel margin] was twice that of Conoco's global portfolio, meaning the global portfolio was about $23 per barrel. Looking at Alaska's oil economics in 2011 (slide 15), Representative Seaton pointed out that the net margin [of $43.50] per barrel of oil was essentially the same as the Eagle Ford net margin [of $45] that ConocoPhillips said it liked. Alaska's 2011 margins were twice ConocoPhillips' global average, which shows how Alaska's taxes get diluted. Moving to slide 16, he noted that ConocoPhillips is very bullish on Alaska: making a final investment decision on expanding the 1H drill site at West Sak and going to viscous oil production, sanctioning construction of site 2S at Kuparuk River, and so forth. The question is how that relates to Alaska versus other oil economics (slide 17). He pointed out that the [total] rig count for Alaska increased between 2008 and 2015 as did the rig count just for ConocoPhillips in Alaska, whereas the rig count in the Lower 48 and in Canada went down between [2012 and 2015]. Oil companies are not investing in new exploration and production in the Lower 48 because they are investing for profit, he said. They are investing in Alaska because it is more profitable - without separate accounting that lower profitability in the Lower 48 reduces their Alaska taxes. 2:26:33 PM REPRESENTATIVE JOSEPHSON said he is interested in this but is inclined to play a bit of devil's advocate. Noting that Representative Seaton is talking about how Alaska's investment climate is better due to worldwide apportionment, he asked whether this isn't the Senate Bill 21 argument all over again. He further asked what the difference is from the oil industry's perspective. REPRESENTATIVE SEATON replied there is quite a bit of difference because it is corporate income tax that is being talked about, which is based on profitability of the oil company, not oil production tax as in Senate Bill 21. He clarified he isn't saying the companies are more profitable here because of worldwide apportionment, rather the state is reducing its taxes because Alaska is more profitable than the other places. From the historical data it can be seen that there was only one time when worldwide apportionment would have gotten Alaska a little more money than separate accounting. Exploration and production, which Alaska is heavy in, is generally more profitable than retail oil sales and refining. 2:28:49 PM REPRESENTATIVE JOSEPHSON reiterated that HB 191 is intriguing to him and noted that he voted against Senate Bill 21, but said it seems that all of last summer's ads on television and in print could have been cut and "corporate income tax" pasted in and statements made about how it would suppress interest in development and the positive economics of development, even though it is a different topic. REPRESENTATIVE SEATON responded he doesn't believe so - the profits are there and then the taxes are applied. He said he doesn't think it is the tax differential that is driving investment in Alaska, the tax differential actually subsidizes investment in lower-profit areas. For example, a company could go into an area where its profit isn't quite as good because the expenses are higher, but those would be somewhat offset because it would reduce the company's taxes in Alaska. It is to Alaska's detriment, not its benefit, that that happens. 2:30:16 PM REPRESENTATIVE SEATON displayed slide 18, "Estimated average oil industry 'margin' per taxable barrel in Alaska for FY16." He pointed out that [under the current production tax method] the company margin before state and federal income tax is $11.04. He opined that companies "are still investing here; the point of this is that rigs are being laid down all over in the Lower 48 and other places, whereas current investment is going here because it's more profitable, if you're more profitable than the other regions then you are going to reduce your taxes here for the expenses that are occurring elsewhere." REPRESENTATIVE SEATON drew attention to slide 19, pointing out that for tax year 2013 the top five oil companies paid taxes of 4.4 percent, whereas under separate accounting they would have paid the statutory rate of 9.4 percent. Thus, under worldwide apportionment rather than separate accounting, Alaska's loss in 2013 was $355 million. The average loss over the last few years is $220 million and $220 million a year is significant given the fiscal times that Alaska is in. 2:31:44 PM REPRESENTATIVE JOSEPHSON inquired whether a policy call was made by either the Hammond Administration or the Sheffield Administration in the early and mid-1980s to come off the corporate income throttle and come down harder on gross income tax or severance tax. REPRESENTATIVE SEATON answered he doesn't believe so. When he came to the legislature there was the Economic Limit Factor (ELF), which was totally broken. Under the Murkowski Administration the second largest oil field wasn't paying anything. There was not a balance made of increasing taxes, there was only a lowering of those and not going back to separate accounting even though there was an Alaska Supreme Court decision telling the legislature that that was an adequate and appropriate way to tax. History has shown that the state would be better off under a [separate accounting] tax regime with a 9.4 percent tax rate, but the legislature for one reason or another has not changed its tax policy and that is why HB 191 is before the committee. The bill would ensure that the taxes are fairly and equitably apportioned to international oil companies as well as Alaska-only oil companies; under separate accounting a tax rate of 9.4 percent would be applied to both types of companies. So, the question before the legislature is whether to charge double taxation on Alaska-only companies, given the tax rate for Alaska-only companies is 9.4 percent and the tax rate for international companies has been 4.4 percent. 2:34:33 PM REPRESENTATIVE TARR asked whether, in relation to activities on the Alaska Liquefied Natural Gas Project (Alaska LNG Project or AK LNG), under separate accounting oil development activities would be accounted for separate from the corporate activities related to AK LNG or would all of that be considered Alaska. REPRESENTATIVE SEATON replied that oil and gas properties generally are consolidated as being Alaska operations in the oil and gas. He deferred to the Department of Revenue for an answer as to whether the transportation is going to be separated. KEN ALPER, Director, Tax Division, Department of Revenue (DOR), responded to Representative Tarr's question by explaining that Alaska's corporate income tax taxes activities within Alaska. It doesn't tax them directly because the relative profitability for those Alaska activities, which includes the profit on the production, the profit on the transportation, and so forth, gets run through this formula of apportionment where it gets compared with the relative numbers in other parts of the world. He said he doesn't envision any difference inside AK LNG. The state's, the corporations', and the partners' in AK LNG's profits would be subject to this tax just as they currently are. In the conversations before the body last year, say, during debate of Senate Bill 138, the property tax and the corporate income tax were sort of outside the in-kind conversation. The expectation was that the State of Alaska would be taking its royalties and its production taxes in-kind and the state would own that gas and run it through that project. Whatever the companies' profits were on their portions of AK LNG would then be subject to corporate income tax. He said he doesn't see where HB 191 would change that mechanism in any way. 2:38:39 PM REPRESENTATIVE JOSEPHSON requested Mr. Alper to provide a few sentences on the foundational philosophy between royalty, a gross severance tax, be it profit or through some other method, and corporate income tax. MR. ALPER answered that the royalty is the landowner's share. In most parts of North America oil and gas are produced from privately owned land so the royalty would go to the owner of that land. Alaska is fortunate in that most of the oil and gas that has been developed on the North Slope is on land that is owned and selected by the state, so the state gets to take that piece as the landowner, regardless of the state's role as the sovereign. The severance tax is the state's right as the sovereign. Because it is a nonrenewable resource that's being severed from the ground, the state is being compensated in some form for the one-time removal of something that fundamentally belongs to the state, a subsurface resource. A corporate income tax is separate from the natural resource world. It is the state's taxation power, also a sovereign power as the state, for the privilege of doing business within Alaska's borders in exchange for the services the state provides. The state collects a tax on the profit of corporate entities. It is a broad tax, it goes beyond the corporations that produce oil and gas; it applies to other large companies that meet the threshold of the corporate income tax. 2:40:45 PM REPRESENTATIVE JOSEPHSON commented that the corporate income tax is literally the fact that the state is enforcing laws and contracts, has a court system, all those privileges that the state affords a corporation. MR. ALPER concurred. The fact that there is an apportionment mechanism is in many ways a simplifying factor, he said, a way in which the various states and their tax administrations cooperate with each other to balance the deck. Where HB 191 goes is to recognize that there are some inherent imbalances specifically in the oil and gas world, perhaps because the nature of the production in Alaska is very different from what happens in the Lower 48. 2:41:30 PM REPRESENTATIVE SEATON pointed out that nothing in the bill would affect credits. All of the credits that would be applicable to the current income tax that is being paid are transferred and are applicable to the tax here. There is no slight-of-hand trying to eliminate or impact credits. Credits are mentioned in the bill only so that all of the credits are available and none of them are available twice: in the year that a credit would be there, it could not be claimed on both the old and new income tax. 2:42:41 PM REPRESENTATIVE TARR inquired whether the accounting system proposed in HB 191 could lead to increased investment, given that a company is balancing credits and investments against each other. MR. ALPER replied that the suite of credits currently available against the corporate income tax are somewhat different in nature than the credits on, say, the oil and gas production tax. The credits tend to be targeted to very specific activities, such as manufacturing, value-added, refinery, education. The corporate income tax, because it has a broad taxpayer base, has been used as a place where credits can be used for desired activity. For example, many of the companies earning a film credit don't pay income tax in the state of Alaska because they are not Alaskan companies, but those credits would then be sold and used by corporate income tax payers. He said HB 191 would maintain all of that structure. All of those taxes, transferable and otherwise, could be used against either the traditional corporate income tax, which would continue to be apportioned, or this new oil and gas corporate income tax, which would use a separate accounting mechanism. [HB 191 was held over.]